Don't see big margin squeeze in retail ahead: Shoppers Stop

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Don't see big margin squeeze in retail ahead: Shoppers Stop

In an interview with CNBC-TV18, BS Nagesh the Vice Chairman of Shoppers Stop wouldn’t say there is a very big slowdown but there is a very relative slowdown compared to what was happening earlier.”

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The retail sector has been buzzing on the news of Foreign Direct Investment in multi-brand retail being seriously considered by the government. On the other hand, it has not been a great festive season for many players in the retail industry which witnessed a slowdown.

In an interview with CNBC-TV18, BS Nagesh the Vice Chairman of Shoppers Stop said, "I wouldn't say there is a very big slowdown but there is a very relative slowdown compared to what was happening earlier." The industry has witnessed many companies' margins taking a dent due to high inflation and discount sales during the festive season.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: There is a lot of growth slowdown that is being talked about. How are you sensing things in the retail space?

A: In the last three-four weeks, one has seen a down trading by the consumers. We have seen that the consumers have probably bought the volumes that they wanted, however, they have down traded on the price and this is more so in the lifestyle products rather than in food because in food we are still seeing trading going on fairly strong. During the festival season, electronics, consumer durables, that part of the business did well because there is a lot of consumer shift happening.

Q: With the slowdown in the lifestyle segment of Indian retail, do you suppose that also holds true for the luxury segment?

A: I will not be able to comment on the luxury segment because it's still a very small segment. As far as the lifestyle segment is concerned, there are two-three areas for example; in the home segment, in hard furniture you will see a slowdown because home buying has slowed down due to the interest regime.

We have also seen that people have down traded on lifestyle apparels although we have not seen down trading as of now in the food segment because people have continued to shop. Especially during the festival season, people don't down trade on food because they look at it as an essential. I wouldn't say there is a very big slowdown but there is a very relative slowdown compared to what was happening earlier.

Q: What are your thoughts on FDI in multi-brand retail? Is that a likelihood? How significant will it be to change the landscape of Indian retail?

A: As far as the likelihood is concerned you would have a better idea because we have been hearing it out of the media only. I hope that the policies which are not initiated make things worse. I have always been a proponent of FDI in retail and I still support it. As far as the impact is concerned - Everybody is looking at the impact only with few retailers coming in but the impact will also be in the ecosystem and the parallel should be drawn with the auto industry.

When you look at the Maruti story, the whole ancillary that they have developed has helped the new players to come and establish. Similarly when a large retail player from international shores comes in, he brings in the full ecosystem whether it is training organisation, fit outs, you have the green movement and their way of looking at suppliers and lot of suppliers are likely to set in factories.

I would definitely urge policymakers to look at what the ecosystem will do in terms of new players and new categories coming in and that the impact will be much larger than the impact of the FDI only into retail. That is very positive. I am looking forward to these changes happening.

Q: What about the new clause that's been added to the FDI in single-brand retail. Do you suppose that now with this additional clause, the owner of the brand will push away some of the prospective buyers from this space?

A: It will depend on case to case because most of the players who are going to enter will be brand owners only because India is a long-term play. Anywhere when you enter a country, you always look at a 10-15 year horizon. Here also whether you are a single-brand or a multi-brand you would have to look at 10-15 years.

So it has to be an investor and a brand owner who will come together. I don't see a major issue and if it goes into 100% then the true owners will come in and maybe they will have partnership with Indians who will help them establish the market because of the complexities of the market.

Q: We have seen the margins of many of the retail players come down over the past few quarters. Given that inflation is very high, we have seen an increase in raw material prices and competition is also heated up quite a bit. Are companies likely to live with these lower margin scenarios?

A: There are two kinds of margin impacts; one margin impact is because of inflation, the second margin impact is also because of non-food price sale that has taken place. The discount sales during the year have gone up and the last impact is also because of self cannibalisation. So as much as all of us appreciate growth, we forget that players who are existing, get growth on the basis of self cannibalisation because they want to capture market opportunities to gain share.

I don't expect margin growth from here until and unless somebody has overstocked himself for the season and underperformed in which case they will have to again go into discounting. We do expect many players in the industry in the apparel segment may have to go into discounting because of a little slowdown relatively. Other than that I don't see the margins squeeze going forward for the industry.